Has the Time to Worry About Rising Inflation Come & What Impact Will It Have on Currencies?

 

According to the federal reserve, the current inflation creep is a temporary thing and will soon pass. However, this is something that can be debatable. Inflation as a whole has been a pain in the neck for the entire world as collective and central banks are irritated by it.

 

There are several examples across the world of countries that are facing significant inflation. In recent times, Brazil is a prime example of a country facing severe inflation. One of the largest economies in the Americas, it experienced inflation of up to 10% in September alone.

 

Of course, the topic of global inflation is one that needs close analysis. To do this, several aspects of it have to be taken into consideration. The main thing is its causes.

 

Contents:

The Causes of Recent Inflation

  1. The price of fuel
  2. The policy of central banks
  3. Supply chain gridlock
  4. A shortage of workers

How Inflation Can Affect Currencies

Emerging Markets & their Relation to Inflation

Final Thoughts

 

The Causes of Recent Inflation

Today’s inflation has been caused by a myriad of factors. Let’s explain the causes and consequences of the recent upsurge of inflation. Among them are the following:

 

1. The price of fuel

The price of oil is one of the main factors that contribute to the inflation problem. Many experts predict that inflation will continue into 2022 owing to ongoing supply shortages. In fact, JP Morgan cites that the insane $80 per barrel threshold could be surpassed by the year's end.

 

2. The policy of central banks

The previous year has seen the flooding of trillions of dollars into economies and the buying of assets through quantitative easing. Entities that have done this include the US, the UK, and the EU. This has continued well into 2021 sees no sign of stopping.

 

Various news outlets claim that the UK plans to phase out QE. However, many experts call this move rash and is actually met with great disapproval.

 

3. Supply chain gridlock

It would seem as though the raw materials, electronic parts, and other essentials in production seem to be depleted. In any case, this lack of raw materials coupled with a deluge of money can only lead to inflation.

 

4. A shortage of workers

The term wage inflation is likely to be familiar to you after this. There are 10 million job vacancies in the US alone and businesses want to fill those places.

 

In order to do so, they offer higher wages. This can have an adverse effect on customers as they will then be charged higher prices for their goods and services.

 

How Inflation Can Affect Currencies

It is somewhat obvious that ECB president Christine Lagarde’s belief that inflation may ease next year has been looked at with apathy. This ease will be preceded by a rise in the EU economy’s inflation.

 

According to Legarde, interest rates are not likely to rise, although the ECB may change its position at 2022’s end. This may result in a Euro/Dollar relationship that is less than favorable.

 

The bank of England also wishes to undergo a similar path as they announced the possibility of rate hikes by the end of the year. This normally means a surge in the GBP, but that is unlikely due to future trader hesitancy.

 

Emerging Markets & their Relation to Inflation

Developing countries have also experienced a spike in prices similar to more developed countries. Notable currencies that did terribly at the end of 2020 include the Turkish lira and the Colombian peso. Other such currencies include the following:

  • The Zimbabwe Zim Dollar
  • The Venezuelan Bolivar Soberano
  • The Brazilian Real
  • The Zambian Kwacha
  • The Seychelles Rupee

 

In these countries, it is virtually impossible to wait and see where inflation may end up. Developed countries have no choice but to act the moment something seems amiss. Some countries have found ways around this, however, Russia and Brazil are examples of developing countries that combat inflation by raising interest rates.

 

These countries rely on in-demand commodities and price increases may actually be beneficial. In fact, one could make the argument that the rising interest rates may actually strengthen their currencies.

 

Final Thoughts

What is cited as the biggest issue that hangs around the neck of markets is the constant uncertainty of the world in 2021. The world is still recovering from the negative impact the global pandemic has had in recent years.

 

Another thing that could result in more global inflation is the possible restrictions that could come with more restrictions. A new COVID-19 variant could spread and bring about further unpredictable issues.

 

These issues are indeed unpredictable. Let’s say an outbreak could result in the price increase of oil which in turn leads to a shortage of workers. In other words, inflation is a cycle. Certain events are so big that they affect the financial world immensely. The stock market and cryptocurrency are two aspects of it that are commonly affected even by mundane events. Inflation falls under this umbrella and anyone not in the financial world can now understand why it happens.


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